Wednesday, June 17, 2009

Bull's Eye: Indian Oil Corp, Financial Tech, Biocon, ONGC, Bata India

Indian Oil Corporation

RESEARCH:

ABN AMRO BANK

RATING:

SELL

CMP:

Rs 556 ABN Amro Bank downgraded Indian Oil Corporation from ‘Hold’ to ‘Sell’ with a target price of Rs 490. IOC reported Q4FY09 net profit of Rs 6,620 crore, turning 9MFY09 losses of Rs 3,670 crore into full-year profit of Rs 2,950 crore. This was largely a result of the contribution from government bonds of Rs 40,370 crore and upstream sharing of Rs 18,200 crore in the full year.

ABN Amro estimates prices of kerosene, LPG, petrol and diesel will need to rise 140%, 42%, 11% and 3% respectively, or crude price will need to fall below $54/bbl, to ensure no gross under-recovery . It expects refining margins to remain low. To maintain adequate profitability, the government, like in FY09, will ensure IOC has no net under-recoveries by contributing in the form of oil bonds and upstream sharing.

As long as gross under-recoveries exist and earnings depend on government policy, IOC’s core business should trade at a discount to book value. At the target price, the core business would trade at 0.9x FY10 price to book value, while IOC’s holding in ONGC/Gail is worth Rs137/share.

FINANCIAL TECHNOLOGIES

RESEARCH:

IDFC

RATING:

OUTPERFORMER

CMP:

Rs1352 IDFC-SSKI initiates coverage on Financial Technologies (FTIL) with `Outperformer’ rating and target price of Rs 2,000. Vision, execution and ability to reinvest capital have prompted the evolution of Financial Technologies from India’s leading exchange solutions provider to Asia’s largest exchange conglomerate.

The ‘only’ gateway to the potential $10-trillion Indian exchanges space, FTIL has captured 87% of the commodity markets through MCX and given taut competition to equity incumbent NSE in currencies through MCX-SX . Besides pioneering niche models in power and spot, five international exchanges have been set up in potentially under-penetrated regions.

BIOCON

RESEARCH:

DEUTSCHE BANK

RATING:

SELL

CMP:

Rs 214 Deutsche Bank maintains Biocon’s estimates and target price of Rs 135, however, it downgrades the rating to `Sell’. Biocon has a poor track record - lacklustre revenue, falling margins and PAT (6%). This is aggravated by increasing working capital and large capex, resulting in higher gearing and low ROCEs. Thus, it has the lowest asset turn and ROCEs amongst peers.

Axicorp’s acquisition will add value only in the medium to long term. Biocon expects to supply mycophenolate and tacrolimus in US for generic launch. Generics are not able to snatch significant market share immediately on patent expiry in immunosuppressants. Moreover, there is a large number of API fillings for both. Also, the patent holder has been able to delay generic companies for tacrolimus for over a year. And there is a possibility of a rebound in licensing fees for Biocon.

ONGC

RESEARCH:

MERRILL LYNCH

RATING:

BUY

CMP:

Rs 1127 Merrill Lynch retains its `Buy’ rating on ONGC with a target price of Rs 1,261. Since the May 16 election results, there is expectation that auto fuel pricing may be freed up to oil price of $75/bbl. Current auto fuel prices reflect $55/bbl of Brent price. Auto fuel pricing freedom up to $75/bbl of Brent price implies a over 20% hike in diesel and gasoline prices. Merrill Lynch, therefore, assumes 8-10 % diesel and gasoline price hike, which has boosted the target price by Rs 111/share.

Earlier, auto fuel subsidy hit of Rs 1,400 crore in FY10E and Rs 5,700 crore in FY11E was assumed. Assuming a 8-10 % price hike in diesel and gasoline has meant no auto fuel subsidy for ONGC up to Brent price of $62/bbl. Thus, now no auto fuel subsidy is assumed in FY10-FY 11E, which has boosted FY10- FY11E EPS by 5-18 %. FY12E EPS is also boosted 15% due to lower auto fuel subsidy.

BATA INDIA

RESEARCH:

STANDARD CHARTERED BANK

RATING:

BUY

CMP:

Rs 161 Standard Chartered Bank initiates coverage on Bata India with `Buy’ rating and a target price at Rs 202. Bata is planning to aggressively expand its retail network of 1,200 stores by 60 stores annually for the next three years. With restructuring of its retail network over the past couple of years, Bata is on a strong wicket to successfully achieve its expansion plans.

During 2004-08, Bata’s revenue compounded 9% annually and EBITDA expanded by 1,600 bps to 9%. During the same period, its debt on balance sheet dropped to Rs 44.6 crore from Rs 122.1 crore . Bata is very well-placed to carry out its expansion plans with improved revenue and profitability growth rate and virtually a debt-free balance sheet.

At this target price of Rs. 202, Bata will quote at a PE of 25.9x and EV/EBITDA of 13.7x 2009E financials. Consistent growth in revenue and PAT of 12% and 15% respectively during 2008-12 may result in re-rating of the stock from the current level. Any disturbance in the cordial relations between the management and their employees and relaxation of retail FDI regulations that may increase competition are the key risks to the call.

CADILA HEALTHCARE

RESEARCH:

CITIGROUP

RATING:

SELL

CMP:

RS 340 Citigroup maintains `Sell’ rating on Cadila Healthcare with a higher target price of Rs 320. It remains concerned over a potential hole in earnings on expiry of Protonix patents and Cadila’s ability to effectively fill the hole. That apart, given the limited differentiation in the company’s biz model, the stock is to continue trading at a discount to its peers. Cadila’s FY09 results had sales and PAT of Rs 99.9 crore and Rs 68.2 crore from the JV with Nycomed. This is likely to be a finite opportunity given the imminent patent expiry of Protonix.

The company also has hedging positions worth about $70 million at an average rate of about Rs45.5/$ and forex debt of about $140 million on its books which provides some cushion against rupee appreciation in the short term. Things to watch out for: (1) Scale up of the Hospira JV: Cadila has guided to three product launches in FY10 and six launches in FY11, and indicated that this could make up for the patent expiry of Protonix; (2) Domestic formulations growth trend: FY09 growth was lacklustre at 9% y-oy . Given that this accounts for about 43% of Cadila’s sales, it would be difficult for Cadila to achieve its guidance of $1bn sales by FY11, without a dramatic pick up in growth.

MPHASIS

RESEARCH:

HSBC

RATING:

OVERWEIGHT

CMP:

Rs 354 HSBC initiates coverage on MphasiS with an `Overweight’ rating and a target price of Rs 430, valuing the stock at an about 25% discount to its largecap peers, in line with the historic range. A mid-tier Indian IT services company of which Hewlett-Packard owns 61%, MphasiS’ top-line growth has outperformed peers over the last few quarters due to strong traction in its HP/EDS accounts. HSBC finds further scope for inroads in the HP/EDS accounts, as HP’s cost-saving targets warrant further offshoring of about 10-12 K employees by end-FY 10.

With EDS’ focus on large deals and a high proportion of ‘offshorable’ services, there is potential to offshore 60% of commercial outsourcing work. HSBC estimates 2% top-line growth here, which could expand MphasiS’ top line by about 16% in FY10E. HSBC forecasts growth in cost of goods sold to be in line with headcount growth and factors in only a modest decline in pricing, as a large proportion of revenue is offshore, where pricing is already at a 15-20 % discount to sector leaders.

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